News

15

Jun 2016

Bargain hunting in the Retail Sector

The demise of BHS and the recent announcement that the administrators will be closing all the shops sees yet another major retailer follow Woolies et al in disappearing from our high streets.

As the death of yet another beleaguered retail chain plays out in the press, the BHS story highlights many of the contemporary issues that UK businesses face and I’ll be covering a few of these in a series of articles.

You will recall that prior to the administration, BHS was subject to a Company Voluntary Arrangement (“CVA”) in March 2016 which subsequently failed. The CVA received widespread press coverage and fuelled further criticism of the use of CVAs to “cram down” the positions of the landlords.

We have been here before of course. Remember JJB Sports? It went through two separate CVAs in 2009 and 2011 before finally entering into administration in September 2012. Both CVA's sought to secure substantial rent reductions on the company’s retail premises in order to make the business viable but the underlying operational and financial problems were never resolved and the company finally staggered into administration and apart from 20 key stores being sold to Sports Direct the business closed.

The key facets of the BHS CVAs were:

The CVA proposal divided BHS’s 164 store portfolio into three main categories, based on the commercial viability and strategic importance of each site.

A total of 77 Category 1 premises were to be retained at current rents. For the next three years, rents were to be paid monthly as opposed to quarterly.

A total of 47 Category 2 premises were deemed viable if a reduction in rent is obtained. To this end:

The leases of 21 properties were to be retained at a reduced equivalent monthly rent of 75% (Category 2A)

The leases of 26 properties were to be retained at a reduced equivalent monthly rent of 50%. (Category 2B)

A reduced equivalent monthly rent of 25% would be paid for a minimum of ten months at a total of 40 Category 3 premises.

A typical cram-down of the landlords. Given the number of vacant units in the high street, landlords are now more willing to accept revised terms as the alternative in another vacant property in the portfolio. However most retail CVA’s involve chains with too many under-performing stores, a tired brand and a turnaround plan that’s too slow. Would BHS’s turnaround plan have worked? We’ll never know, but as the CVA was being passed commentators at the time noted that BHS’ ongoing survival was dependent upon a) raising an additional £100m to fund a retail turnaround and b) successful discussions with the Pension Protection Fund (“PPF”) over BHS’s £571m pension deficit.

You don’t need the benefit of hindsight to spot that these were big hurdles to jump – and crucially the PPF abstained from voting in the CVA. BHS didn’t raise the finance and the PPF refused to bail out the pension scheme and it was of course no surprise that BHS finally limped into Administration in April.

The key lesson from all this is that for a CVA to truly work you need to have the ongoing operational working capital secured, the CVA needs to bind ALL the creditors and you need a turnaround plan that works. Without this you’re just fiddling whilst Rome burns...